BHP Billiton, Rio Tinto won’t proceed with tie-up

SarahTurner

SYDNEY (MarketWatch) — The world’s second- and third-largest iron-ore producers called off their proposed joint venture in Western Australia on Monday, outlining strong regulatory opposition to the deal.

Rio Tinto (RIO)
RIO, -2.29%
said Monday that the companies jointly decided to end plans for the $116 billion tie-up after they were advised that the proposal would not be approved in its current form by five regulatory bodies.

The European Commission, the Australian Competition and Consumer Commission, the Japan Fair Trade Commission, the Korea Fair Trade Commission and the German Federal Cartel Office wouldn’t have approved the venture, Rio Tinto said.

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“Some regulators have indicated they would require substantial remedies that would be unacceptable to both parties, including divestments, whereas others have indicated they would be likely to prohibit the transaction outright,” Rio Tinto said.

Neither Rio Tinto nor BHP Billiton (BHP)
BHP, -1.50%
will pay a fee to exit from the planned venture. The break-up fee had been set at $275.5 million.

Rio Tinto said that it was disappointed that regulators didn’t agree with its pro-competitive view of the proposed iron ore joint venture but emphasized its “exceptional” operating assets and expansion potential in the Pilbara — where the planned tie-up was to have operated. It said it’s already pushing ahead with a major development program.

Both parties were reluctant to walk away from the venture, according to BHP Billiton but “since the agreement was signed, it has become increasingly apparent that regulatory approvals of the joint venture are unlikely to be achieved.”

BHP Billiton also signaled that it will continue to invest in its Western Australian iron-ore operations with a focus on “efficiently growing and operating” the business.

The companies said last year when the deal was announced that they were expecting synergies of more that $10 billion from combining their iron ore assets in Western Australia.

Still, investor reaction to the news was relatively muted, with BHP Billiton shares down 1.3%, paring monthly gains to 5.7%, while Rio Tinto shares were down 0.7%, cutting its monthly rise to 7.7%.

Over the last few weeks, there had been repeated speculation in the press that the deal wouldn’t go ahead, with steel makers reportedly opposing the deal.

“It’s no surprise to me. They ran into some pretty vicious political headwinds in Europe,” said Hayden Bairstow, analyst at CLSA.

“They had already started looking at plan B,” he said, pointing out that Rio Tinto in particular is committed to a large amount of capital expenditure in Western Australia.

Bairstow also said that the joint-venture deal, first announced in mid-2009, itself came about after the firms failed to merge.

“They were already going to have to sell some iron-ore assets to get that done. Whatever deal they want, they can’t pull all the assets together,” he said.

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